Sustained slowdown

Global economic outlook poses challenges

The global economic picture emerging from the International Monetary Fund’s (IMF’s) latest World Economic Outlook (WEO) is concerning. Medium-term growth is unlikely to recover to the levels seen in recent decades. According to the latest projections, global growth is expected to slow to 2.8 per cent in 2023, compared to 3.4 per cent in 2022. The April projection is 0.1 percentage point lower than the January update. The IMF has also revised its growth projections for India. It now expects the Indian economy to expand 5.9 per cent in the current fiscal year, which is 0.2 percentage points lower than the January projection. It has also reduced the projection for 2024-25 by 0.5 percentage points to 6.3 per cent.

The IMF’s growth forecast is significantly lower than the Reserve Bank of India’s latest estimate, which pegged growth at 6.5 per cent in the current fiscal year. Some private sector economists expect growth to be much lower than the IMF’s projection of 5.9 per cent for the current year. Although the IMF expects growth in India to improve in the next fiscal year, it is likely to remain subdued in the medium term because of unfavourable global economic conditions. According to IMFs projections, the global economy is unlikely to return to pre-pandemic growth rates in the foreseeable future. Looking ahead to 2028, the IMF has forecast global growth of 3 per cent — the lowest medium-term forecast since 1990. In two preceding decades, 2000-09 and 2010-19, the global economy expanded by an annual average of 3.9 and 3.7 per cent, respectively.

Further, not only is the baseline growth projection lower, there are significant downside risks. For instance, as the WEO notes, there is a 25 per cent chance —more than double the usual — of global growth slipping below 2 per cent in 2023. Notably, UK-based economic advisory firm Oxford Economics in a note on Wednesday termed IMF’s projections as optimistic and argued that it underestimates the impact of financial conditions tightening in advanced economies. There are a variety of plausible factors that can affect growth in the medium term. The IMF’s baseline projections, for example, assume that the problems in the financial sector are contained. While it appears that troubles in the banking sector have been contained for now, a sharp increase in interest rates after years of easy availability of money could lead to more mishaps in developed markets, which can tighten financial conditions and affect growth.

Although central banks have raised interest rates sharply to contain inflation, which is expected to come down in 2023, it would still take some time to attain price stability. Higher public and private debt at a time of higher interest rates can also increase risks. Besides, the geo-economic fragmentation of recent years, partly driven by the US-China rivalry and the invasion of Ukraine, would dent global efficiency and growth prospects. The growth in global trade volume, for instance, is projected to drop to 2.4 per cent in 2023, compared to 5.1 per cent in 2022. It will thus be important for Indian policymakers to keep the global economic backdrop in mind while making interventions. This would essentially mean that they will have to do more not only to create policy buffers but also to enable higher economic growth over the medium term.